US Manufacturing Production Smashes Forecasts – GBP/USD Comes Under Pressure

The outlook for the Pound US Dollar (GBP/USD) grew slightly worse on Friday, with the pairing falling into the afternoon on a raft of upbeat private sector readings for the US.

According to the US Federal Reserve, industrial production – the measure of output at factories, utilities and mines in the US – climbed by 1.1% in February, smashing expectations for a modest 0.4% increase and marking the highest result in four months.

This was largely due to robust output gains in manufacturing, particularly within the oil and gas sectors.

Indeed, manufacturing production accelerated by 2.5% year-on-year – the highest annual gain in factory output data seen since July 2014.

In other news the University of Michigan’s consumer sentiment reading for the US jumped to 102 in March, up from 99.7 in February and smashing the market expectation of 99.3.

This was the highest reading since January 2004, with a new all-time record favourable assessment of current economic conditions in the US.

These readings underline the current strength of the US private sector, and coming just short of next week’s Federal Open Market Committee (FOMC) meeting, it is highly likely that they will push the central bank even closer to a rate hike.

It should also be stressed, however, that this week’s slightly muted US inflation readings did temper the same expectations, news that could cause some policymakers to move cautiously.

EU Brexit Summit Looms – What can we expect for the Pound US Dollar (GBP/USD) Exchange Rate?

Next week could be a big one for the Pound, with market volatility likely to result from the EU’s Brexit summit and the UK’s highly anticipated inflation and wage growth readings.

UK Brexit Secretary David Davis is set to fly to Brussels this weekend and meet with the EU Chief Negotiator Michel Barnier, with negotiators rapidly trying to find agreement on the proposed transition period before the key EU leaders’ summit.

Both sides have acknowledged small degrees of progress over the past few days, and politicians seem to be increasingly confident that a deal will be reached in time, but the biggest threat continues to be the dispute over the Irish border.

If no progress is revealed on this front then it could delay trade talks even longer, leave businesses lacking clarity even longer and potentially limit investment.

Markets currently expect the Bank of England (BoE) to keep interest rates on hold at the March rate meeting, though some forward guidance could cement market expectations for a 25bps rate hike in May.

Indeed, the willingness of the Monetary Policy Committee (MPC) to tolerate above-target inflation seems to have largely diminished, with 5 out of the 9 BoE Policymakers now considered outright hawkish, 2 categorised as centrist and only 2 dovish.

This outlook is reflected by Analysts at Rabobank, who stated in a note:

‘We therefore expect to hikes this year: one in May and one in November. […] As this meeting comes without an inflation report and the associated press conference, the focus will be on the statement on monetary policy and the minutes of the meeting’.

This outlook could change, however, depending on the performance of UK inflation and wage growth, with lower-than-expected or soft readings liable to hurt hawkish sentiment.